Demand will be market driver over next few months

Cattle price pullback was likely even before LFTB discussion.
Labeling changes and other ramifications could come from the LFTB discussion.
Consumer reaction to LFTB will also be relatively short lived.

Apr 27, 2012

Given recent historic highs in cattle prices, it shouldn’t have been surprising to see values dip somewhat during March, but consumer response to news of lean, finely textured beef in the nation’s meat supply hit cattle and beef values harder than many could have anticipated, according to a Kansas State University agricultural economist.

“I think we were due in early March for a pause. The fact that we’ve had a pullback from historic highs is not really a surprise,” said Glynn Tonsor, livestock marketing specialist with K-State Research and Extension.

He said CME April fed cattle futures closed at $118 per hundredweight (hundredweight) on April 6, down about $12 from a month earlier. Similarly, April feeder cattle futures closed at $148, down from $161 in early March. Cash cattle prices softened similarly, with Kansas fed cattle prices off about $3 at $123 to $124 on April 6.

“But the fed cattle basis is quite strong – stronger than normal,” Tonsor said, with cash cattle trading $5 to $6 over futures. Part of the concern right now, he said, is overall demand for beef. Beef exports have been generally flat compared to last year, as has the dollar index.

Still bullish

“I’m still fundamentally bullish on (beef) exports, but when we look at individual weeks, that’s part of the pullback. I’m not going to say we’ve burst the bubble, but we’ve pulled back a bit on that bullishness,” he said.

The economist said oil and gas prices and their forecasts also played a role in consumer demand, but added: “I tend to think that’s a little bit overhyped. Gas still makes up a portion of our individual decision making, but it’s mainly an indirect effect in how it’s embedded in the prices of many things we buy. Add all that up with the LFTB stuff then we have more concern about demand than we did a month ago.”

“Perception is reality. The consumer dollar drives the vast majority of what goes on and people make decisions based on perception. These decisions may or may not be consistent with scientific reality,” he said. “To say ‘it’s beef, stupid’ or ‘it’s always been beef’ may be accurate – and I personally believe that, but I’m not sure it’s sufficient to change perception. You can’t trump perception immediately with science.

“One of the things I’ve found in other studies—such as the impact of media attention to animal welfare issues and meat recalls—is that total (aggregate) beef demand is typically affected for one to two quarters. That’s still multiple weeks or months, but it doesn’t persist for five years,” he said. “I tend to think consumer demand reaction to this story in this context will also be relatively short lived.”

Labeling changes

He said labeling changes and other ramifications could come from the LFTB discussion.

“The part that is less known and what may be a little more costly is change on the supply side – the cost of doing business,” he said. “At the extreme, if we quit using LFTB, and I don’t expect that will happen, but if we take that away from the toolbox, the cost of business goes up. If we add labeling, that’s an added cost, but not as expensive as removing it, and there are a lot of things in between.

“I think the net impact is the cost of producing ground beef and the cost of beef overall is going up from this, and that probably will have some staying power that goes beyond the negative demand aspects that lasts one or two quarters.” He said in March, prices for fresh 90 percent lean boneless beef trimmings dipped about 0.7 percent, but prices for fresh 50 percent lean trimmings (less lean) had fallen 17.6 percent ($83 per hundredweight) by March 31 compared to $101 on March 3. Fresh 50 percent lean prices fell even further the week before Easter, hitting $63 per hundredweight.

“The reason I mention this is that fresh 90 percent lean trimmings held up and stayed relatively flat during March. The less lean product, which is typically blended with or subject to LFTB, has been hammered,” Tonsor said.

“Estimates are that roughly 10 percent of beef on a carcass would fall into the fresh 50 percent lean category and if you use that 10 percent assumption and basically a $40 per hundredweight falloff in the value of that product during March, that amounts to essentially a $4 per hundredweight value pullback on fed cattle. That explains a decent portion of the pullback on fed cattle prices during March,” he said.

“If you go further and recognize there was discussion even before the LFTB about heavy cattle weights—we’ve had better growth than we expected—when we have heavier animals, we tend to have even more than usual fall into that fresh 50 percent lean category,” he said. “So at the extreme, if we had 15 percent of pounds falling into that 50 percent category – and I’m probably pressing the point here – if you had that you could explain probably a $6 pullback in fed cattle prices.

“The truth is, maybe somewhere between the $3 and $5 value pullback in fed cattle could be assigned narrowly to the drop in fresh 50 percent lean prices.”

Tonsor is still analyzing beef demand data for the first quarter of 2012 (January-March), but expects it will show a negative year-over-year picture. He said several analysts over the past few months, before the current discussion, were reminding that the tight supply situation was already known – kind of fixed – so the value of cattle is hinging on demand.

He expects the LFTB issue to continue to be sorted out and that it likely will still have an effect on beef and cattle prices for the short term.